A week or so ago, a colleague of mine from BiggerPockets reached out and made the valuable suggestion that I write an article, specifically, on arrears. When note investing, especially with delinquent assets, you will run into the question of how to collect arrears.
Notice I said collect. When investing in performing notes and mortgages, we think more of passive investing where there’s usually little interaction, if any, with the borrower. But with nonperforming notes, collections are a more prominent factor. Your ability to contact and negotiate with the borrower really determines how successful and profitable you’ll be in the business.
So What Exactly Are Arrears, and What Do They Consist Of?
Arrears are the overdue debt not including UPB (Unpaid Principal Balance), such as any missed payments, late fees, or corporate advances. Corporate advances can consist of any money spent towards legal, any other costs that are spent in order to collect, or any money spent in order to protect one’s interest as a lien holder. A few good examples of are tax payments, homeowners insurance, condominium or homeowner association fees, or any other reinstatement fees paid to a more senior lien, etc.
But, How Do You Approach Arrears When Dealing With a Homeowner?
Once you do make contact with the homeowner(s) and they let you know their intention (and it is to stay in the home), now the focus becomes affordability. We use our Homeowner Financial form to go over their income and expenses, as well as their assets and liabilities, to determine how much money they have available and how much they can put towards a monthly payment. At this time, we try to determine what disposable income, or capital, if any, is left to …read more